Put in simple terms, a borrowing base represents the amount you can borrow given an asset-based loan. So let's say you are pledging collateral to secure your loan. The borrowing base enables the lender to figure out the value of the assets that are being used as collateral and thus allows them to better determine how much to lend you. The more value your collateral has, the higher your borrowing base and so, the more money the lender is apt to loan your business.
Collateral comes in all shapes and sizes. Some use real estate, others may pledge equipment or inventory. You might even use accounts receivable to secure a loan. The borrowing base arrived at will vary from lender to lender, as even though you may present the same type of collateral, what different lending institutions are willing to advance you can at times be drastically different.
Among the most common types of financing in which a borrowing base is used to help calculate the loan amount are accounts receivable financing, inventory financing, and equipment financing.
Accounts Receivable Financing
This type of loan is issued based upon the invoices yet to be collected. So, in essence, you are selling the lending company the unpaid accounts receivable in exchange for an advance on a percentage of that amount. They will then go ahead and attempt to collect and upon doing so, will give you the remainder of the funds minus their fees.
Inventory Financing
The inventory that you have becomes the collateral in this type of loan. Very often this will translate to either a short term loan or perhaps a line of credit. Based upon the value of said inventory, the lender advances the funds. The terms will stipulate how exactly repayment will work going forward.
Equipment Financing
In equipment financing the terms are fairly cut and dry as the equipment itself becomes the collateral. The money you borrow will be used either to purchase the equipment outright or potentially lease it.
If you are searching for the ideal business loan program for your small business, First Union Lending may have just what you need. Our business loans are fast and flexible. Call today to find out more!